Peapack-Gladstone Financial Corporation — FY2018 Form 10-K
Reporting period: Year ended December 31, 2018. This is an annual report; the filing also provides unaudited fourth-quarter results. The Company is a New Jersey bank holding company operating Peapack-Gladstone Bank, with commercial and consumer banking and private wealth management businesses concentrated in New Jersey and nearby markets.
Financial performance and position
| Metric | FY2018 / Dec. 31, 2018 | FY2017 / Dec. 31, 2017 |
|---|---|---|
| Interest income | $159.7 million | $138.7 million |
| Net interest income | $115.2 million | $111.1 million |
| Net interest margin | 2.75% | 2.80% |
| Wealth management fees | $33.2 million | $23.2 million |
| Net income | $44.2 million | $36.5 million |
| Diluted EPS | $2.31 | $2.03 |
| Total assets | $4.62 billion | $4.26 billion |
| Total loans | $3.93 billion | $3.70 billion |
| Total deposits | $3.90 billion | $3.70 billion |
| Shareholders’ equity | $469.0 million | $403.7 million |
- Operating cash flow was $64.2 million; investing cash outflow was $297.7 million and financing cash inflow was $280.8 million. Cash and cash equivalents increased $47.3 million to $160.8 million.
- At year-end, FHLB advances were $108.0 million, subordinated debt net of issuance costs was $83.2 million, and capital lease obligations were $8.4 million. Average loans-to-deposits were 103.53% (versus 99.63% in 2017).
- Liquidity sources included $377.9 million of available-for-sale securities and unused secured borrowing commitments of $1.3 billion each from the FHLB and Federal Reserve Bank. Management said liquidity was adequate.
- The Bank’s year-end capital ratios were 14.59% total risk-based capital, 13.56% Tier 1 and CET1, and 11.32% Tier 1 leverage. The Bank was categorized as well capitalized.
- Allowance for loan losses was $38.5 million, or 0.98% of loans; provision expense was $3.6 million. Net charge-offs were $1.5 million.
Changes versus the prior comparable period
- Net income rose 21% and diluted EPS rose 14%. Higher net interest and wealth management income and a lower federal tax rate contributed; higher operating expenses partly offset growth.
- Net interest income increased 4% on a fully tax-equivalent basis, while margin declined five basis points to 2.75%. Interest expense rose 61% to $44.5 million as deposit and borrowing costs increased.
- Loans grew 6%. Commercial and industrial loans, including equipment finance, increased 46% to $1.40 billion; multifamily loans fell 18% to $1.14 billion as the Company shifted toward C&I lending and sold $131.3 million of multifamily loans.
- Deposits increased 5%; customer deposits excluding specified brokered balances grew 6% to $3.66 billion. Operating expenses rose 15% to $98.1 million, reflecting acquisitions, hiring and strategic-plan costs.
- Nonperforming loans increased to $25.7 million, or 0.65% of loans, from $13.5 million, or 0.37%. The increase was principally associated with one $15.2 million healthcare real-estate-secured commercial credit, which the Company said continued to pay as agreed and was believed well secured. Allowance coverage of nonperforming loans declined to 149.73% from 269.33%.
- Wealth management assets under management and/or administration increased 5% to $5.8 billion, including the September 2018 Lassus Wherley acquisition. The Company also acquired MCM and Quadrant in 2017.
Outlook, commentary, risks and unusual items
- The filing provides no specific numeric earnings or growth guidance. Management expects higher operating expenses in 2019 and beyond; it also said the New Jersey tax changes could increase the effective tax rate by up to three percentage points in 2019, depending on application of combined-reporting rules.
- Management’s strategy emphasizes commercial banking, wealth management growth through acquisitions and organically, core-deposit gathering, and risk, capital and liquidity management. New wealth personnel and acquisitions may add expense before producing revenue.
- Unusual items included a $4.4 million loss on loans held for sale at lower of cost or fair value, primarily related to the multifamily loan-sale strategy; management expected the sale’s earnings benefit from reinvestment to offset that loss in approximately two years. The Company also recorded $3.0 million of life-insurance proceeds following the death of Murphy Capital Management’s founder and managing principal, and $405,000 of intangible-asset impairment expense related to that event.
- Key risks include rising deposit and funding costs, interest-rate sensitivity, credit deterioration and real-estate concentration, growth and acquisition execution, liquidity and brokered-deposit access, cyber and operational disruptions, and regulatory or tax changes. CECL adoption was expected to affect loan-loss accounting; the Company had not determined the magnitude of the impact.
- The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting. The Company reported no pending or threatened litigation believed likely to have a material adverse effect.
Most important facts for investors to verify
- Whether nonperforming loans and troubled debt restructurings continue to rise, especially the $15.2 million healthcare-secured credit, and whether allowance coverage remains adequate.
- Whether strong C&I and equipment-finance growth translates into sustainable returns without weakening underwriting or asset quality.
- Whether loan and deposit growth can be funded at acceptable cost, given average loans-to-deposits above 100%, higher funding costs and reliance on brokered deposits.
- Whether wealth acquisitions deliver expected fee growth and integration benefits relative to their added compensation, operating and intangible-amortization costs.
- Whether the multifamily loan-sale strategy achieves its expected earnings payback, and how the stated two-year expected offset compares with subsequent results.
- The effect of New Jersey tax rules, CECL adoption and changing interest rates on future earnings, capital and credit-loss reserves.